Long/Short strategy to manufacture capital losses

[surprising]

I saw this strategy talked about recently and was wondering if anyone has tried it. Say you expect a large capital gain this year and want to minimize capital gains tax. You can simultaneously go long one stock and go short a substantially similar stock. So perhaps long VOO, short SPY. No matter what direction the market heads, one side of the trade is going to be positive, and the other is going to be negative, and your overall position stays neutral. Once the negative side generates enough losses, you can sell that side to book capital losses to offset your large capital gain.

Now all this really did was defer the capital gains, as the positive side will show gains that you will need to realize eventually. But you can use it to offset losses in future years. Also this strategy doesn't work if the stocks you chose end up staying flat for the year. Might be interesting in an emergency (i.e. trying to stay under ACA cliff) without having to book actual losses.

 

[COcheesehead]

This is were tax loss harvesting over the long term pays off. You can create a piggy bank of loss carry overs that last into the future until exhausted.
I did it in 2009 and milked the benefits until 2016. I also did it in 2022 and have a decent amount still available all while never really being out of the market.

No cap gains? $3000 a year can still be taken against earned income.

The carryovers and my QSBS benefits took big bites out of my taxes the year I sold my business. You never know when these carryovers will come in handy.

 

[FD1000]

I did a similar thing in 2008, the only year I had big losses. I sold close to the bottom and immediately bought another fund. I used these carryover losses for at least 10 years, because our taxable account was about 20-25% of our portfolio.

 

[ERD50]

...Say you expect a large capital gain this year and want to minimize capital gains tax. You can simultaneously go long one stock and go short a substantially similar stock. So perhaps long VOO, short SPY. No matter what direction the market heads, one side of the trade is going to be positive, and the other is going to be negative, and your overall position stays neutral. Once the negative side generates enough losses, you can sell that side to book capital losses to offset your large capital gain. ....

This isn't making any sense to me. If you expect a large capital gain this year, that's likely a position you've held for quite a while. You can't expect that one leg of something you go long and short on this year will go down anywhere near as much as your LTCG.

And, you've tied up 2x the funds to maintain this neutral position (and give up divs on the short leg).

I did a similar thing in 2008, the only year I had big losses. I sold close to the bottom and immediately bought another fund. I used these carryover losses for at least 10 years, because our taxable account was about 20-25% of our portfolio.

This makes sense to me. Conventional tax loss harvesting, while re-investing in something similar, but unlikely to raise attention from the IRS, since that 'similar' definition has never been tested AFAIK.

And this too is only a deferral of taxes, but, if you don't sell during your lifetime, your heirs inherit at the step-up basis. And/or you sell smaller amounts over the years, after the losses are used, you might be able to stay in a lower tax bracket.

 

[COcheesehead]

And this too is only a deferral of taxes, but, if you don't sell during your lifetime, your heirs inherit at the step-up basis. And/or you sell smaller amounts over the years, after the losses are used, you might be able to stay in a lower tax bracket.

I don’t see it as a deferral. A carryover loss applied to a current taxable capital gain, eliminates the gain, forever.

 

[Koolau]

To the uneducated (like me) this begins to sound like "Voodoo" economics. I hope it w*rks for you.

 

[ERD50]

I don’t see it as a deferral. A carryover loss applied to a current taxable capital gain, eliminates the gain, forever.

It's a deferral in the sense that the 'similar' replacement has been purchased at the low price /value that you are selling the other investment for, so it has a low cost basis, meaning higher gains when (if) sold later.

EXAMPLE A: You buy $100 of XYZ a few years ago, you sell to take a loss against other gains when it dropped to $80. But you used the $80 to buy a similar ABC that tracks closely.

Years later, that $80 investment in XYZ or ABC is now worth $130. If you sell now, you have a LTCG of $130-$80 = $50. An earlier $20 loss, a later $50 gain is a net $30 gain.

EXAMPLE B: You bought $100 of XYZ as above, but never sold it until the later $130 value. The same $30 net gain as above.

 

[Beststash]

sound like "Voodoo" economics.

I'd forgotten that term - seems quite contemporary. ☮

 

[COcheesehead]

It's a deferral in the sense that the 'similar' replacement has been purchased at the low price /value that you are selling the other investment for, so it has a low cost basis, meaning higher gains when (if) sold later.

That’s a maybe, all dependent on what happens to the 2nd investment, but the gain from the first disappears.

 

[ERD50]

That’s a maybe, all dependent on what happens to the 2nd investment, but the gain from the first disappears.

Well, it all assumes equivalent investments, like SPY vs VOO, that track very closely. Otherwise, it's anyone's guess.

 

[surprising]

This isn't making any sense to me. If you expect a large capital gain this year, that's likely a position you've held for quite a while. You can't expect that one leg of something you go long and short on this year will go down anywhere near as much as your LTCG.

Selling a rental property for a large gain.

 

[Sunset]

I don't see a large value in generating a loss on purpose, I'd rather gain $ and pay the tax.

If you want a quick loss, buy any stock, rental house, etc and sell it for 1/2 price.

 

[db4759648]

Selling a rental property for a large gain.

This would basically be transferring the gain from the house sale to the long position. You won’t avoid the taxes but be able to determine when the gains are realized.

 

[junkanoo]

I don't see a large value in generating a loss on purpose, I'd rather gain $ and pay the tax.

If you want a quick loss, buy any stock, rental house, etc and sell it for 1/2 price.

Sure ... just tell us what to buy and we'll get right on those gains.

As I've written, I'm trying out a Long/Short strategy through FREC and will report gains when I've reached the one year mark. Meanwhile, tax loss harvesting YTD are $4,949 on a $100k investment. So, the hope is that this investment returns gains and losses. Many in Silicon Valley are using this approach to offset concentrated profits. Naturally, this isn't a one-year approach, but an ongoing approach to be worthwhile.

Time will tell.

 

[SteveTX]

Don't forget to account for the ongoing cost of the money used for the short positions taken, including short ETF dividend cost drags, and the cost of the interest or dividends you could have been getting with another long position in stocks or bonds, instead of the short position.

 

[junkanoo]

Don't forget to account for the ongoing cost of the money used for the short positions taken, including short ETF dividend cost drags, and the cost of the interest or dividends you could have been getting with another long position in stocks or bonds, instead of the short position.

I agree about the cost of money to maintain short positions. The rest seems quite iffy.

Tell me ... if the long position is a loss (with dividends considered) do you still penalize the short positions?

If the long positions are losing ... do you penalize the long positions for the losses (compared to what would have resulted if you only had more short positions)?

 

[CalBird]

You will need cash to play the long/short game to delay the capital gain. Often times the reason you have to sell some assets which cause capital gains is because you need cash.

 

[db4759648]

This strategy seems to make (some) sense if you have a concentrated position (eg. house gains, or company stock) and want to diversify without selling or paying taxes on the gain right now. You don't save on taxes and there is a cost (margin expenses, etc), but you can lower the risk of a concentrated position.

 

[plank2505]

This is what frec does. I use the normal direct indexing product and I generated around $17k of losses in tax year 2025 while tracking the S&P index and paying the same expense ratio as SPY.

They also a long/short product which has a higher cost. Here is the long/short Long short direct indexing, no advisor needed and here is a whitepaper from their research team Using factor tilted investing and maximizing tax alpha with long short direct indexing

If you are interested in frec, PM me and I can give you my referral code (we both get $250).